Input service distribution – New Restrictions imposed

NEW DELHI, MAR 16, 2012: VIDE Notification No 18/2012 CE(NT) dated 17.3.2012, an important amendment has been made to CENVAT Credit Rules, 2004 relating to distribution of CENVAT Credit on input services. Rule 7 of the CENVAT Credit Rules at present, reads as under:

7. Manner of distribution of credit by input service distributor.- The input service distributor may distribute the CENVAT credit in respect of the service tax paid on the input service to its manufacturing units or units providing output service, subject to the following condition, namely:-

(a) the credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon; or

(b) credit of service tax attributable to service use in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed

This rule has been substituted with a new rule to provide certain restriction on distribution of CENVAT Credit. According to the new rule,

(a) the credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon;

(b) credit of service tax attributable to service used in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed;

(c) credit of service tax attributable to service used wholly in a unit shall be distributed only to that unit; and

(d) credit of service tax attributable to service used in more than one unit shall be distributed prorata on the basis of the turnover of the concerned unit to the sum total of the turnover of all the units to which the service relates.

For example,

if the advertisement is for a product or service provided from only one unit, the said credit shall be distributed only to that unit; and if two units, the said credit shall be distributed only to those two units, in proportion to the respective turnovers;

This new rule is effective from 1.4.2012.

This new rule is a mockery of the concept of distribution of credit. Now, each unit may take its own credit rather than be a distributor.